Friday, July 10, 2009

Energy, Commodities and the U.S. Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Light sweet crude fell below 60 this morning in European trading. It has traded as low as 58.86 pre market. Brent seems to be trading higher, which is unusual since it is a poorer quality oil . This type of price inversion was common in February when oil hit its bottom. While a number of commentators claim 60 is strong support for light sweet crude, there is a Fibonacci retracement around 58 and this is a place where the price could hold. We will have to see. There has been too much selling too fast in the oil market and it is has been based on attempts at government manipulation of the market through the CFTC, not because there is an oversupply of oil as the press continually and inaccurately reports (oil in U.S. storage is actually dropping at a precipitous rate).

While the CFTC has regulatory power over all commodity trading in the U.S., it specifically singled out the energy markets for potential trading restrictions. Even though the alleged reason was speculators were causing high prices, it is planning on investigating the natural gas market even though natural gas is trading at a multi-year low (obviously those speculators are incompetent). The real motivation behind the CFTC's action is that the EFT UNG owns 20% of the futures contracts in the market and this is making the big Wall Street players uncomfortable. Issuance of new shares of UNG were suspended on July 7th because regulatory approval wasn't forthcoming. Without the ability to issue new shares with increasing investor demand, an ETF turns into a de facto closed-end fund. Expect this to eventually happen to every ETF. The vested interests are not going to let small investors hone in on their turf.

Every commodity has had a big sell off during July trading and it can all be traced to the CFTC. Fundamentals have nothing to do with it in the case of oil, gold and silver, so you should assume a reversal back to previous values will take place once this is over. While commodities usually trade inversely to the dollar, there has been no dollar rally. The trade-weighted dollar bottomed in early June at 78.40 and has only gotten about 3 cents above the level at its best since then. It closed under 80 again yesterday. Even this morning though the media was reporting 'oil and gold selling off on higher dollar'. They have reported this same story over and over again. One of the news reports today didn't even have any price quote for the dollar, a violation of basic reporting rules. They know their whole story falls apart if people actually have the facts in front of them.

As for the CFTC, will it be investigating manipulation of the silver market by the two big banks with huge short positions? They have been made aware of this, but like the SEC with Bernie Madoff the CFTC is a hear no evil, see no evil operation when it comes to large Wall Street interests manipulating the commodity markets. That is as long as that manipulation supports the government's desire to help prop up the dollar and the economy with lower gold, silver, and oil prices. Short term manipulation eventually leads to long term problems however. Commodity producers just stop producing when the price gets too low and then shortages result if the price is held down too long. Natural gas is probably priced around that level right now.

NEXT: The Non-Stimulating Economic Stimulus Plan

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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